134 PART • Producers, Consumers, and Competitive Markets APPLYING CONSUMER SURPLUS Consumer surplus has important applications in economics When added over many individuals, it measures the aggregate benefit that consumers obtain from buying goods in a market When we combine consumer surplus with the aggregate profits that producers obtain, we can evaluate both the costs and benefits not only of alternative market structures, but of public policies that alter the behavior of consumers and firms in those markets EXAMPLE THE VALUE OF CLEAN AIR Air is free in the sense that we don’t pay to breathe it But the absence of a market for air may help explain why the air quality in some cities has been deteriorating for decades To encourage cleaner air, Congress passed the Clean Air Act in 1977 and has since amended it a number of times In 1990, for example, automobile emissions controls were tightened Were these controls worth it? Were the benefits of cleaning up the air sufficient to outweigh the costs imposed directly on car producers and indirectly on car buyers? To answer these questions,Congress asked the National Academy of Sciences to evaluate emissions controls in a cost-benefit study Using empirically determined estimates of the demand for clean air, the benefits portion of the study determined how much people value clean air Although there is no actual market for clean air, people pay more for houses where the air is clean than for comparable houses in areas with dirtier air This information was used to estimate the demand for clean air.8 Detailed data on house prices in neighborhoods of Boston and Los Angeles were compared with the levels of various air pollutants The effects of other variables that might affect house values were taken into account statistically The study determined a demand curve for clean air that looked approximately like the one shown in Figure 4.16 Value (dollars per pphm 2000 of reduction) F IGURE 4.16 VALUING CLEANER AIR The yellow-shaded triangle gives the consumer surplus generated when air pollution is reduced by parts per 100 million of nitrogen oxide at a cost of $1000 per part reduced The surplus is created because most consumers are willing to pay more than $1000 for each unit reduction of nitrogen oxide A 1000 10 NOX (pphm) pollution reduction The results are summarized in Daniel L Rubinfeld, “Market Approaches to the Measurement of the Benefits of Air Pollution Abatement,” in Ann Friedlaender, ed., The Benefits and Costs of Cleaning the Air (Cambridge: MIT Press, 1976), 240–73